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Making allowances

An important issue in respect of the new A-Day legislation which still requires clarifi-cation is whether personal contributions in excess of an individual’s earnings to a registered pension scheme made after A-Day will count towards the annual allowance.

According to the CII, personal contributions in excess of the greater of 3,600 gross and an indiv-idual’s UK relevant earnings will not benefit from tax relief and will not count towards the annual allowance.

For example, someone earning 50,000 could make a personal contribution of 300,000 in May 2006 and, even though they would only get tax relief on 50,000 gross, they would not be subject to the annual allowance charge of 40 per cent on the 85,000 that would be in excess of the 215,000 annual allowance that will apply in 2006/07.

However, while it is clear that tax relief will not be available on any “excess” contributions, both ourselves and Scottish Life believe that the wording in FA04 and the RPSM pages on HMRC’s web-site could be interpreted as meaning that there is no reason why a contrib-ution in excess of an indiv-idual’s earnings should not count towards the annual allowance. The only exception to this rule would be where an individual dies or vests all their benefits in the scheme during the tax year in which the allowance is exceeded.

This is because the pension input amount which deter-mines the amount to be tested against the annual allowance is the total of all “relievable pension contributions” paid during the year by or on behalf of the individual plus those paid by the employer. This may, of course, look like anything over 100 per cent of salary does not count towards the annual allowance. However, if you look at the definition of “relievable pension contribution” in FA04 s188, it says: In this part, relievable pension contributions

in relation to an individual and a pension scheme means contributions by or on behalf of the individual under the pension scheme other than contributions to which subsection (3) applies.

Sub-section three specifies only contracted-out contrib-utions, contributions paid after age 75 and employer contributions (the last of which are specified as counting towards the annual allowance under s233 of FA04). Sections 190-192 then explain how tax relief will be granted on relievable contributions.

Bankhall and Scottish Life believe that this can therefore be interpreted as meaning that although all personal contributions are “relievable”, the actual relief given will be subject to the 100 per cent of earnings limit. So, when it comes to the annual allow-ance, it is the “relievable” contribution figure which is used and it is not therefore necessarily the case that tax relief will have been given on the total of these “relievable” contributions.

This would appear to make sense when you consider that someone earning 20,000 a year could win the Lottery and pay, say, 1m into a PP. While they would only get tax relief based on their 20,000 earnings (a net cont-ribution of 15,600 would be grossed up to 20,000) they will still benefit from virt-ually tax-free growth on the invested contribution and up to 25 per cent of the fund could subsequently be taken as a tax-free cash sum when the benefits are crystallised.

We wrote to HMRC and have since had written confirmation that it agrees that the legislation can indeed be interpreted in the way ourselves and Scottish Life have suggested. HMRC says this issue is being considered by its policy team.

Chris Shore

Technical adviser,

Bankhall Investment Associates,

Altrincham

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